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Oil Is Going To Keep Rising And Inflation Is Coming

The stealth bull market in oil continues
Back in early 2016 I called oil my “trade of the lustrum” (a lustrum is a five-year period – it’s an almost criminally underused word). With West Texas Intermediate oil (WTIC) at $33 a barrel, and Brent crude oil at $36, we said “buy, hold and forget”.

The wager has been a good one. With the usual wobbles along the way, oil has steadily ground higher so that now, two years on, WTIC stands at $71 and Brent at $79.

On revisiting the trade along the way, we’ve noted that this is a stealth bull market, and stealth bull markets are the best kind of bull markets, because few people are talking about them.

But this is the bottom line: it’s a bull market. Bull markets are to be involved in, not stared at. You want to have some oil exposure in your portfolio. It’s that simple.

Previous oil bull markets have been accompanied by powerful narratives: the explosion of the Asian middle class – especially in China – means huge demand. A dearth of new discoveries in readily-accessible locations means the end of cheap oil. Oil production has peaked; it declines from here. We are past Peak Oil.

Instead we’ve seen technological advances which have seen the US become the world’s largest oil producer. Production is no longer such an issue, apparently. New battery technologies and electric cars have been the hot topics. And as for the Asian middle classes and their new-found wealth – they appear to have disappeared, for all you read about them.

Of course, the Asian middle classes have not disappeared. They are now richer than they were during the bull market of the 2000s. There are many more of them. And, despite what you may hear about the vehicles of the future, the vehicles of the present run on oil.

Supply may have increased, but so has demand. Demand is growing all the time and it exceeds supply, as this chart from the International Energy Agency (IEA) shows.